SMBs welcome Federal Reserve interest rate cut

While the Federal Reserve’s rate cut this week was predicted, the 50 basis-point cut surprised those who anticipated the minimum 25-point cut. Lauren Saidel-Baker from ITR Economics, who spoke to over 300 leaders at the Vistage Executive Summit in Orange County on Monday, shared, “Inflation is finally coming down under control. However, price levels are still rising; we are seeing disinflation vs. deflation.”

Regarding interest rate cuts, Saidel-Baker predicts, “The next round of inflation is coming for us, and that will constrain the ability of the Fed to keep cutting rates. The market has been expecting 200 basis points of cuts over the course of this cycle; I think that is ambitious. At ITR Economics, we expect between 50 and 100 basis points of total cuts between the second half of this year and early 2025.”

With inflationary pressures, small and midsize businesses have been holding off on investing as cash has become more expensive at elevated rates. Early analysis of the Vistage CEO Confidence survey conducted Sept 3-17, 2024, revealed that 33% plan to increase fixed investments, while 51% plan to keep investments the same. A cut in interest rates will impact 76% of small and midsize businesses surveyed.

In fact, of those affected by interest rate cuts, nearly 40% of CEOs shared that they would be affected by a rate cut of a quarter- (16%) or half-point (23%). Most indicate they need a whole point (42%) or 2 percentage points (19%) to see impacts, so these leaders may hold off on making incremental investments until there are additional rate cuts.

These impacts can be both direct and indirect.

Overall, CEOs plan to take advantage of this cut’s positive impacts, from hiring more workers to recapitalization and pulling forward CapEx projects. Others see this as an opportunity to build inventory, stockpiling it to protect against future price increases.

“We are presently expanding our advisory services in advance of what we believe will be an increase in M&A activity, “ shares Ellen Wood, CEO of vcfo in Austin, Texas.

Drew Bahner, co-owner of Expanded Solutions based in Oklahoma City, says, “We will stockpile inventory because lowering interest rates will add to the money supply, which is, by definition, inflationary.”

He also recognizes the short-term impact of the cuts. “Inflationary monetary policy will only increase prices in the long term,” Bahner adds. “We will unload dollars for materials and assets.”

However, it will take some time for small and midsize businesses to fully realize the effect of these cuts. When asked about how long it would take, 23% reported less than 3 months, 28% reported 3-6 months, and 23% reported up to one year.

“If a rate cut spurred an increase in consumer demand or housing construction, that would trickle to the industrial manufacturing sector in 3-6 months,” says Joseph Royal, President of HM Royal Inc. based in Trenton, New Jersey. The interest rate reduction has both direct and indirect impacts, and understanding and anticipating the timing is critical for small and midsize business leaders.

“It takes time, and this is the first in a series of cuts,” says Saidel-Baker.

The latest Vistage CEO Confidence Index report will be released next month. Early analysis of the survey data, which was collected before the Federal Reserve announcement, reveals that confidence is slowly improving, which will no doubt be buoyed by the interest rate cut. However, dropping interest rates is only part of the equation, as many CEOs shared that election uncertainty is also a factor in their decision-making and customer activity.

Related Resources

Vistage CEO Confidence Index

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